We agree that there is an uptick in promotions this year which we believe is one part reactive as it is well-known that retail traffic industry-wide is anemic and promotions across the mall are significantly higher. On a relative basis, we believe
Michael Kors
(ticker: KORS) is among a handful of other accessories manufacturers that will continue to outperform.

In the very near term, we expect a choppy retail environment to impact shares of Michael Kors, despite our expectations for continued fundamental outperformance relative to estimates and despite management's optimistic quarter-to-date commentary. However, we continue to believe there is upside to our revised full-year 2014 earnings-per-share estimates and we expect continued-EPS beats relative to Street expectations in fiscal 2014, albeit at a smaller magnitude or surprise relative to recent quarters.

To a lesser extent, we believe that an uptick is being driven by a better-stocked retail inventory position relative to last year when demand significantly outpaced Michael Kors' ability to chase and we believe that this is an indication of management's commentary regarding the "normalization" of trends. It is our view however that the additional clearance merchandise in the stores is effectively driving conversion as channel checks continue to show stronger traffic at Michael Kors versus other retailers.

We view this strategy as the inevitable maturation of the brand against a highly promotional backdrop and not an indication of any brand impairment or merchandising issue. Management has indicated that normalization was imminent during every conference call since it's been public and we believe long-term investors are braced for this. Normalization of gross margins particularly merchandise margins will likely be offset by the mix shift to more retail as the company has about 30% more retail stores versus last year.

We are comfortable with a modest near-term reset of comps expectations however we continue to forecast an increase of 20% overall comps versus last holiday's 41% comp increase, in line with management's guidance. What does keep us more conservative on our comp estimate despite our view that higher conversion could drive the comp ahead of our expectation, is the lack of Internet sales -- recall its Internet business is a operated by a third party, Neiman Marcus Group. We think the optimization of more e-commerce sites for a mobile interface is significantly increasing online sales this Christmas relative to last year, however Michael Kors' e-commerce sales are booked as wholesale sales.

Our price target is a simple blended average of the following: 1) a forward price-to-earnings of 30 times (derived from a price-to-earnings-to-growth of 1.2 times) our calendar 2014 earnings-per-share estimate of $3.23; 2) price-to-sales multiple of 8.5 times; 3) 18 times our earnings power assumption of $5.20, offset by; 4) an enterprise value to earnings before interest, taxes, depreciation and amortization (EV/Ebitda) of 15 times our fiscal 2014 Ebitda estimate and finally; 5) our discounted-cash-flow analysis.

-- Corinna Freedman -- Alicia Reese

The companies mentioned in Hot Research are subjects of research reports issued recently by investment firms. Their opinions in no way represent those of Barrons.com or Dow Jones & Company, Inc. Share prices at the time the report was issued and the date of the report are in parentheses.

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